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| TAP > SEC Filings for TAP > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided as a supplement to, and should be read in conjunction with, our audited consolidated financial statements, the accompanying notes, and the MD&A included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007, as well as our unaudited consolidated financial statements and the accompanying notes included in this Form 10-Q.
On March 5, 2008, we announced the creation of the Global Brand and Market Development organization ("Global Markets"), whose objectives are to grow and expand our business and brand portfolios in global development markets. As a result of this decision, our current businesses in Asia, Continental Europe, Mexico, and the Caribbean (not including Puerto Rico) are now included in Global Markets and combined with our corporate business activities, Corporate also includes corporate interest and certain other general and administrative costs that are not allocated to any of the operating segments. In order to reflect this change, the former Europe segment has been re-named as the United Kingdom segment ("U.K.") and includes the results of operations of the United Kingdom and the results of our royalty arrangements in the Republic of Ireland. The United States segment ("U.S.") now represents only the United States and Puerto Rico. As a result of the realignment, prior period amounts have been classified to conform to the current operating structure described above.
Effective July 1, 2008, Molson Coors Brewing Company ("MCBC") and SABMiller plc ("SABMiller") combined the U.S. and Puerto Rico operations of their respective subsidiaries, Coors Brewing Company ("CBC") and Miller Brewing Company ("Miller"). In connection with the closing of the joint venture transaction, each of Molson Coors, CBC, SABMiller and Miller have entered into an Amended and Restated Operating Agreement (the "LLC Operating Agreement"). The LLC Operating Agreement will be the primary operating document governing the joint venture, MillerCoors LLC ("MillerCoors").
Pursuant to the LLC Operating Agreement, MillerCoors has a Board of Directors consisting of five MCBC-appointed directors and five SABMiller-appointed directors. The percentage interests in the profits of MillerCoors are 58% for SABMiller plc and 42% for MCBC, voting interests are shared 50%-50%. Each party to the joint venture has agreed not to transfer its economic or voting interests in the joint venture for a period of five years, and certain rights of first refusal will apply to any subsequent assignment of such interests.
Beginning in the third quarter of 2008, the results and financial position of U.S. operations, which has historically comprised substantially all of our U.S. reporting segment will, in all material respects, be prospectively deconsolidated from MCBC. Also beginning in the third quarter of 2008, our interest in the new combined operations will be accounted for by us under the equity method of accounting. Our equity investment in MillerCoors will represent our U.S. operating segment going forward.
BUSINESS OVERVIEW
Financial Highlights
The following third quarter highlights summarize components of our condensed consolidated summary of operations for the thirteen and thirty-nine weeks ended September 28, 2008 and September 30, 2007. Due to the seasonality of our operating results, quarterly financial results are not
an appropriate basis from which to project annual results. See "RESULTS OF OPERATIONS" below for further analysis of our reportable segment results.
Thirteen weeks ended Thirty-nine weeks ended
September 28, September 30, September 28, September 30,
2008 2007 % change 2008 2007 % change
(Volumes in thousands, dollars in millions,
except per share data and percentages)
Volume in barrels 4,669 11,141 (58.1 )% 25,453 31,332 (18.8 )%
Net sales $ 921.1 $ 1,685.4 (45.3 )% $ 4,035.2 $ 4,590.3 (12.1 )%
Income from
continuing
operations $ 170.0 $ 135.1 25.8 % $ 309.4 $ 338.7 (8.7 )%
Diluted income per
share from
continuing
operations $ 0.92 $ 0.74 24.3 % $ 1.67 $ 1.87 (10.7 )%
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Consolidated Global Volumes including Proportionate Share of Equity Investments'
volume
Thirteen Weeks Ended Thirteen Weeks Ended
September 28, September 30, September 28, September 30,
2008 2007 % change 2008 2007 % change
(In Thousands) (In Thousands)
Actual Pro forma(1) Actual Actual
Volume in U.S.
barrels:
Financial volume 4,669 4,709 (0.8 )% 4,669 11,141 (58.1 )%
Royalty volume 67 59 13.6 % 67 59 13.6 %
Owned volume 4,736 4,768 (0.7 )% 4,736 11,200 (57.7 )%
Proportionate
share of equity
investment
sales-to-retail(2) 7,289 7,238 0.7 % 7,289 - 100.0 %
Total worldwide beer
volume 12,025 12,006 0.2 % 12,025 11,200 7.4 %
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º (2)
º Reflects the addition of MCBC proportionate share of MillerCoors and Molson
Modelo sales-to-retail for the periods presented, adjusted for comparable
trading days.
Thirty-nine Weeks Ended Thirty-nine Weeks Ended
September 28, September 30, September 28, September 30,
2008 2007 % change 2008 2007 % change
(In Thousands) (In Thousands)
Actual Pro forma(1) Actual Actual
Volume in U.S.
barrels:
Reported financial
volume 25,453 24,901 2.2 % 25,453 31,332 (18.8 )%
Royalty volume 173 151 14.6 % 173 151 14.6 %
Owned volume 25,626 25,052 2.3 % 25,626 31,483 (18.6 )%
Proportionate
share of equity
investment
sales-to-retail(2) 7,412 7,352 0.8 % 7,412 - 100.0 %
Total worldwide beer
volume 33,038 32,404 2.0 % 33,038 31,483 4.9 %
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º (2)
º Reflects the addition of MCBC proportionate share of MillerCoors and Molson
Modelo sales-to-retail for the periods presented, adjusted for comparable
trading days.
Third quarter 2008 highlights:
º •
º Molson Coors leading brands performed strongly in each of the
company's major markets:
º •
º High-single-digit growth of Canadian strategic brands
º •
º Growth in seven of MillerCoors' twelve largest brands
º •
º Market share increase for Carling in a difficult U.K. beer market
º •
º Sales-to-retail on a comparable basis grew 3.7% in Canada, and
declined 3.1% in the U.K.
º •
º The Canadian business is performing well, however, competitive price
discounting in Québec, along with continued commodity inflation,
challenged Canada's performance during the quarter.
º •
º The U.K. business has grown market share and net sales per barrel on
the strength of its brands, despite an array of U.K. industry
challenges.
º •
º In its first quarter of combined operations, MillerCoors grew
trading-day-adjusted sales-to-retail 0.7% in the U.S., and increased
revenue per barrel 3%.
º •
º Additionally, MillerCoors management team expects to accelerate its
three-year synergy savings targets by six months versus the original
commitment when the joint venture was announced more than a year ago.
º •
º MCBC acquired an economic exposure to Foster's Group ("Foster's")
(ASX:FGL) via a cash settled total return swap arranged in Australia
by Deutsche Bank. This swap gives MCBC exposure to nearly five percent
of Foster's outstanding common stock.
º •
º MCBC net income increased 29% to $173.2 million for the third quarter
of 2008.
Cost savings initiatives
Our annual 2008 Resources for Growth ("RFG") cost reduction initiatives goal is to achieve $77 million and we have achieved more than 85% of the goal during the first three quarters of the year. In the third quarter of 2008, we realized $19 million of savings, in addition to the $47 million in savings recognized in the first half of 2008.
MillerCoors will absorb some of the RFG cost savings initiative benefits, along with some pre-existing Miller cost savings initiatives. Our 42% proportional share of these savings, which are in addition to the $500 million of committed MillerCoors cost synergies, will enable us to deliver on our overall cost saving commitment.
Income taxes
Our effective tax rate for the third quarter of 2008 was approximately 25%. We anticipate that our 2008 full year effective tax rate will be in the range of 20% to 24%. Our third quarter effective tax rate is higher than our anticipated full year rate primarily due to reductions in unrecognized tax benefits in the first quarter of 2008.
Discontinued operations
Discontinued operations are associated with the formerly-owned Kaiser business in Brazil. See Part I-Financial Statements, Item 1 Note 7 "DISCONTINUED OPERATIONS" and Note 14 "COMMITMENTS AND CONTINGENCIES" for discussions of the nature of amounts recognized in
the Discontinued Operations section of the condensed consolidated statements of operations, which consists primarily of amounts associated with indemnity obligations to the owners of Kaiser related to purchased tax credits and other tax, civil and labor issues.
RESULTS OF OPERATIONS
Canada Segment Results of Operations
Our Canada segment consists primarily of Molson's beer business, including the production and sale of the Molson brands, Coors Light and other licensed brands, in Canada. Effective, January 1, 2008, Molson and Grupo Modelo, S.A.B. de C.V. established a joint venture, Molson Modelo Imports ("MMI"), to import, distribute, and market the Modelo beer brand portfolio across all Canadian provinces and territories. Under the new arrangement, Molson's sales team will be responsible for promoting and selling the brands across Canada on behalf of the joint venture. The new alliance will enable Grupo Modelo to effectively tap into the resources and capabilities of Molson to achieve greater distribution coverage in the Western provinces of Canada. The MMI joint venture is accounted for using the equity method. The Canada segment also includes our arrangements related to the distribution of beer in Ontario and the Western provinces, through Brewers Retail, Inc. ("BRI") a consolidated joint venture, and Brewers' Distributor Ltd. ("BDL") a joint venture accounted for under the equity method.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28, September 30, September 28, September 30,
2008 2007 % change 2008 2007 % change
(Volumes in thousands, dollars in millions, except percentages)
Volume in barrels 2,149 2,206 (2.6 )% 5,764 6,001 (3.9 )%
Net sales $ 541.7 $ 546.2 (0.8 )% $ 1,458.0 $ 1,418.5 2.8 %
Cost of goods sold (278.5 ) (263.6 ) 5.7 % (753.2 ) (728.1 ) 3.4 %
Gross profit 263.2 282.6 (6.9 )% 704.8 690.4 2.1 %
Marketing, general
and administrative
expenses (110.9 ) (119.7 ) (7.4 )% (334.7 ) (336.4 ) (0.5 )%
Special items, net (3.0 ) (43.2 ) N/M (4.9 ) (71.4 ) N/M
Operating income 149.3 119.7 24.7 % 365.2 282.6 29.2 %
Other income, net (1.3 ) 1.4 N/M (0.5 ) 18.5 N/M
Earnings before
income taxes $ 148.0 $ 121.1 22.2 % $ 364.7 $ 301.1 21.1 %
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Foreign currency impact on results
The Canadian dollar ("CAD") appreciated 1% versus the U.S. dollar ("USD") resulting in a $1 million increase to USD earnings before income taxes on a quarter over quarter basis during the thirteen week third quarter. During the comparable thirty-nine week periods for 2008 and 2007, the CAD appreciated by nearly 6% versus the USD, resulting in a $21.6 million benefit for USD earnings before income taxes.
Volume and net sales
With formation of MillerCoors, the revenues and production costs of MCBC products sold by Molson in Canada for U.S. distribution, which were previously treated as inter-company sales and eliminated upon consolidation, are now included in Canada segment results. However, the sales volume continues to be eliminated from our Canada results, as this volume is now reported by MillerCoors.
This reporting change will have the effect of increasing net sales per barrel by approximately 5% to 6% and increasing cost of goods sold per barrel approximately 9% to 10% per quarter, with minimal impact on gross profit. These increases will impact this quarter and the next three quarters as we cycle prior year results that do not reflect this treatment.
Our Canada segment had sales volume totaling 2.1 million barrels for the third quarter ended September 28, 2008, a decrease of 2.6% from the prior year quarter. This decline is entirely the result of excluding our reported Modelo volumes in 2008 with the creation of our joint venture. Excluding this factor, current quarter sales volume of 2.1 million barrels increased 2.6% on a comparable basis versus prior year. Our Canada sales to retail ("STRs"), for the third calendar quarter ended September 30, 2008 increased 3.7% on a comparable basis versus a year ago, driven by strong industry performance and high-single-digit growth of Molson's strategic brands, which represent more than 85% of our Canada STRs. Strategic brand growth was fueled by double-digit growth of Coors Light, Rickard's, and Carling, and comparable partner import brand growth at a high-single digit rate. Molson Canadian experienced a mid-single-digit volume decrease compared to the prior year. Total Canadian beer industry STRs grew an estimated 3.1% in the calendar third quarter. On a comparable basis, our third quarter estimated Canada market share increased approximately one quarter point versus a year ago.
Net sales per barrel increased 1% in local currency over the prior year quarter. Excluding the effects of the Foster's contract termination, the MMI joint venture and the impact of sales to MillerCoors as disclosed above, net sales per barrel increased slightly as a result of favorable sales mix of our products, including sales increases of our higher-revenue per barrel partner-import brands. Pricing per barrel declined approximately 1% in the third quarter as we faced significant pricing pressure in Québec and, to a lesser degree, in Ontario.
Sales volume for the thirty-nine week period totaled 5.8 million barrels, a decrease of 3.9% compared to the prior year. This decline was due entirely to the exclusion of Modelo volumes from our sales volume under the equity method of accounting for MMI. Excluding this factor, comparable Canada sales volume increased 0.9% compared to the prior year. Comparable sales to retail for the thirty-nine week period increased 1.2% versus a year ago.
Net sales per barrel for the thirty-nine week period decreased 0.4% in local currency. Excluding the net effect of the changes to our Foster's and Modelo contracts this year, as well as the changes in our recognition of net sales for product sold to MillerCoors, net sales per barrel increased 2.1% on a comparable basis. Positive net pricing contributed an increase of 1.4% to net sales per barrel in local currency, and improved sales mix contributed a further 0.7% increase.
Cost of goods sold
Third quarter 2008 cost of goods sold per barrel increased 7.6% in local currency versus 2007. Excluding current year impacts of the termination of the Foster's contract, the changes associated with MMI and sales to MillerCoors, cost of goods sold per barrel increased slightly less than 7% on a comparable basis in local currency. This cost of goods increase was due to the net effect of three factors:
º •
º Higher commodity, packaging material and other input costs drove a 5%
increase, combined with a 2% increase due to increased fuel costs and
incremental transportation costs to supply Western markets while we
upgrade our Vancouver brewery.
º •
º These inflationary increases were partially offset by a 2.5% decrease
from our Resources for Growth cost savings initiatives.
º •
º And finally, slightly more than 2% increase due to the ongoing shift
in sales mix, including increased sales volume in our higher-cost
partner import brands.
Cost of goods sold per barrel for the first three quarters of 2008 decreased 0.2% in local currency. On a comparable basis, excluding the net impacts from the changes related to our Foster's and Modelo contracts, the change in sales to MillerCoors and the benefit of cycling a $7.4 million unfavorable foreign currency adjustment last year, cost of goods sold per barrel increased 7.1%. Inflationary cost increases drove an approximate 6.5% increase, which was partially offset by an approximate 2.5% reduction from our Resources for Growth cost savings initiatives. The remaining 3% increase is due to higher fixed overhead costs and the ongoing shift in sales volumes, including increased partner import brand sales volumes.
Marketing, general and administrative expenses
Marketing, general and administrative expense decreased 8.1% in local currency for the third quarter of 2008. This decrease was driven by lower intangible amortization and general overhead expenses compared to prior year, combined with the elimination of all expenses associated with the Modelo brands, which are now managed by MMI. These decreases were partially offset by increased promotional spending in the quarter.
For the thirty-nine weeks ended September 28, 2008, marketing, general and administrative expenses have decreased 8.0% in local currency driven by lower intangible amortization and general overhead expenses, cost savings initiatives under our Resources for Growth program, and the elimination of all expenses associated with the Modelo brands, which are now managed by MMI.
Special items, net
The Canada segment recognized a $3.0 million special charge in the third quarter of 2008 related to costs associated with an impairment of Montréal brewery assets, the ongoing Edmonton brewery closing expenses and restructuring activities.
The Canada segment recognized a $4.9 million special charge in the first three quarters of 2008, compared to $71.4 million of expense for the same period in 2007. See Part I-Financial Statements, Item 1 Note 5 "SPECIAL ITEMS, NET" to the condensed consolidated financial statements for further discussion.
United States Segment Results of Operations
During the first two quarters of 2008 and the first three quarters of 2007, the United States ("U.S.") segment produced, marketed and sold the Coors portfolio of brands in the United States and Puerto Rico and includes the results of the Rocky Mountain Metal Corporation and Rocky Mountain Bottle Corporation, which are consolidated joint ventures. The U.S. segment also includes sales of Molson products in the United States. As of July 1, 2008, MillerCoors began operations. The results and financial position of our U.S. segment operations were prospectively deconsolidated upon contribution to the joint venture, and our interest in MillerCoors is being accounted for and reported by us under the equity method of accounting. MCBC's equity investment in MillerCoors will represent our U.S. operating segment going forward. See
OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES" regarding MillerCoors joint venture.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
September 28, September 30, September 28, September 30,
2008(1) 2007 % change 2008(1) 2007 % change
(Volumes in thousands, dollars in millions, except percentages)
Volume in barrels 98 6,432 (98.5 )% 12,693 18,184 (30.2 )%
Net sales $ 12.9 $ 736.8 (98.2 )% $ 1,504.8 $ 2,080.1 (27.7 )%
Cost of goods sold (7.7 ) (455.1 ) (98.3 )% (915.1 ) (1,273.9 ) (28.2 )%
Gross profit 5.2 281.7 (98.2 )% 589.7 806.2 (26.9 )%
Marketing, general
and administrative
expenses (1.2 ) (200.7 ) (99.4 )% (413.3 ) (582.4 ) (29.0 )%
Special items, net - (2.8 ) N/M (69.3 ) (2.8 ) N/M
Equity income in
MillerCoors 106.5 - N/M 106.5 - N/M
Operating income 110.5 78.2 41.3 % 213.6 221.0 (3.3 )%
Other income, net - - N/M 2.3 0.9 N/M
Earnings before
income taxes $ 110.5 $ 78.2 41.3 % $ 215.9 $ 221.9 (2.7 )%
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º (1)
º Reflects the formation of MillerCoors on July 1, 2008. Prior periods
reflect results of the Company's pre-existing U.S. results of operations.
The results of operations for MillerCoors for the three month ended September 30, 2008, and pro forma results of operations for the three month period ended September 30, 2007 are as follows:
For the three months ended
September 30, September 30,
2008 2007 % change
Actual Pro Forma
(Volumes in thousands, dollars in millions, except
percentages)
Volumes 18,646 18,808 (0.9 )%
Sales $ 2,293.4 $ 2,249.9 1.9 %
Excise taxes (343.7 ) (341.2 ) 0.7 %
Net sales 1,949.7 1,908.7 2.1 %
Cost of goods sold (1,236.9 ) (1,179.2 ) 4.9 %
Gross profit 712.8 729.5 (2.3 )%
Marketing, general and administrative
expenses (519.1 ) (568.0 ) (8.6 )%
Contract settlement - 16.8 N/M
Special items, net (22.6 ) (2.8 ) N/M
Operating income 171.1 175.5 (2.5 )%
Other income (expense), net 2.3 (1.5 ) N/M
Income from continuing operations before
income taxes and minority interests 173.4 174.0 (0.3 )%
Income tax expense (1.9 ) - N/M
Income from continuing operations before
minority interests 171.5 174.0 (1.4 )%
Minority interests (3.3 ) (5.6 ) N/M
. . .
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